Discharge of Surety (Sec.133)

Introduction

Section 133 of ICA explains discharge of surety by variance.

Any variance, made without the surety’s consent, in the terms of the contract between the principal 1[debtor] and the creditor, discharges the surety as to transactions subsequent to the variance.

This section basically is the outcome of the general rule that states all the parties shall be privy to the contract. It states that when an amendment is made in a contract without taking surety, the surety is discharged.  Surety is not bound to something for which he has not contracted.

For example: 

X guarantees Z against the misconduct of Y in an office to which Y is appointed by Z, and of which the duties are defined by an Act of the Legislature. By a subsequent Act, the nature of the office is materially altered. Afterwards, Y misconducts himself. X is discharged by the change from future liability under his guarantee, though the misconduct of Y is in respect of a duty not affected by the later Act

X becomes surety to Z for Y’s conduct as a manager in Z’s bank. Afterwards Y and Z contract without surety’s consent, that Y’s salary sell be raised. In this Surety that is X is discharged as X did not know about the contract between Y and Z.

Here is case of Anirudhan v The Thomco’s Bank Ltd.  It was held that the surety is not discharged as the contract between the principal debtor and creditor is beneficial to the surety.

In Mahadeo Prasad Jaiswal & Ors. v. Canara Bank & Ors. It was stated that any variance which is made without, the consent of surety in terms of the contract which is between the creditor and principal debtor ,will discharge surety as the transactions subsequent to variance. The Learned Counsel of appellant had invited some attention towards the Mohan Jatia v. Indian Bank, I (2005) BC 212 : AIR 2004 Cal. 326. It lays down the liability of the surety ,that should not exceed the extent which is provided in Section 133 of Indian Contract Act.

Section 134

The discharge of the surety by the release of Principal Debtor is stated under section 134 of Indian Contracts Act ,1872 .

Section 134 of Indian Contracts Act ,1872 states that the surety gets discharged by a contract between the principal debtor and the creditor , in which the principal debtor gets released, or by an act or an omission of the creditor, the legal consequence of which is the discharge of principal debtor. 

In Subramania Aiyar v. Gopala Aiyar And Ors. section 134 says  that the surety gets discharge by an act or omission done by the creditor, the legal consequence of that act is the discharge of surety that doubt in the face for the express language of the seection 28 of the Indian Limitation Act XV of 1877 which merely the debtor does not discharged by period of time may also be gathered from the section 25 and section 6O of the Indian Contract Act , 1872

In Mahant Singh vs U Ba Yi  it was held that under Section 134 of the Indian Contracts Act 1872 the surety gets discharged if, and only if, a contract has been entered into by which the principal debtor is released, or if there has been any act or omission on the part of the creditor the legal consequence of which has been to discharge the principal debtor.

For Example :

X contracts with Y to grow a crop of sugarcane on X’s land and to deliver it to Y at a fixed rate, and Z guarantees X’s performance of this contract. Y diverts a stream of water which is necessary for irrigation of X’s land, and thereby prevents him from raising the sugarcane. Z is no longer liable on his guarantee.

X gives a guarantee to Z for goods to be supplied by Z to Y. Z supplies goods to Y, and afterwards Y becomes embarrassed and contracts with his creditors (including Z) to assign to them his property in consideration of their releasing him from their demands. Here Y is released from his debt by the contract with Z, and X is discharged from his suretyship

2 types of release are stated under Section 134 of Indian Contract Act :

Implied release:

In implied release the words in section  “by any kind of act or commission of the creditor, the legal consequence of which is the discharge of the principal debtor”is an implied release or discharge.

Express release:

In such kind of situations in express contract between the principal debtor and creditor result in the discharge or release.

Surety gets discharged by a contract between the principal debtor and the credito, from  which the principal debtor gets released, or by an act or omission by the creditor, the legal consequence of which is  discharge of the principal debtor.

For Example:

X contracts with Y for a fixed price to build a house for Y within a stipulated time. Y supplying the necessary timber. Z guarantees X’s performance of the contract. Y omits to supply the timber. Z is discharged from his suretyship.

In Sankana Kalana v. Virupakshapa Ganeshapa  section 134 of the Contract Act states that the sankana's omission to sue  principal Mohidin gets discharged  that boar his own costs throughout. Pinhey, J. 3. Reading Section 134 of Act IX of 1872 with Section 137 of ..., as held in Hajarimal v. Krishnaram I.L.R. 5 Bom. 647 by Section 137, which obviously governs the present case. 2. It is contended, however, on behalf of the respondent Virupakshapa

Section 135 of Indian Contract Act 1872

It states the surety gets discharged when the creditor compounds with, gives time to, or agrees not to sue the principal debtor. It states a contract between the principal debtor and creditor , from which the creditor will make a composition , or will  promises to give lapse of time, or to not sue, the principal debtor, discharge the surety, unless the surety assents to such contract.

To make composition with here essentially means that if the creditor will make any kind of compromise with principal debtor with respect to debt them surety will get discharged.

Promise to give time to here essentially means that where the creditor will extend the time for the payment of the debt without  surety’s consent, then the surety will get discharged.

Not to sue the principal debtor essentially means that if the creditor will agree with the principal debtor not to ever sue him, the surety will get discharged.

In Chakkunny v. Viswanatha Iyer it was stated that section 135 of the Indian Contract Act is an effective answer to the discharge of the surety,single Judge of the Allahabad High Court held in Kunj Lal v. Batuk Prasad (120 I.C 552) that the surety gets discharged from his liability under section 135 of the Indian Contract Act ,1872 in the judgment there is no discussion of the principle.

Section 136 

It states that the surety is not discharged when an agreement is made with third person to give time to principal debtor

Section 136 clearly states that where a contract to provide time to principal debtor is made by the creditor with a third person and is not with the principal debtor, then the surety will not get discharged.

Section 136 also deals with the non discharge of a surety from its obligations when the creditor will create a contract with the third party which will seeks to give some extra time to the principal debtor.

For Example:

Z, the holder of an overdue bill of exchange drawn by X as surety for Y, and accepted by Y, contracts with V to give time to Y. X is not discharged.

In Sri K.V. Ramkrishna Guru v. The Chief Manager, Syndicate Bank it was held that section 136 of the Indian Contract Act is based on the principle that when a principal debtor gets discharged the surety also gets discharged. According to the Advocate for the appellant the guarantor will stand discharge when the creditor aims to proceed against the principal debtor, because under the provisions of Indian Contract Act the liability of the guarantor is coextensive with that of the borrower unless it is otherwise provided by the contract.

Section 137  of the Indian Contracts Act ,1872

It states that the creditors for bearance to sue do not discharge surety where the forbearance on  part of the creditor to sue the principal debtor or to enforce any other kind of  remedy against him will not discharge the surety. Mere forbearance means own its own. When the creditor do not sue the principal debtor on its own then the surety is not discharged.

For Example:

Y owes to Z a debt guaranteed by X. The debt becomes payable. Z does not sue Y for a year after the debt has become payable. X is not discharged from his suretyship.

Section 138 of Indian Contract Act 1872

It states that the release of one co-surety does not discharge the others.

Section 138 under the Indian Contracts Act 1872 also states that where there are co-sureties, a release by the creditor of one of them will not discharge the others and neither will it free surety so released from its responsibility to other sureties.

S.P GUPTA V. STATE AND ORS.

In this case it was stated  that so far as the release of the other guarantors, who guaranteed the loans, is concerned, it is not denied that the personal guarantors had been. released by the corporation, but they were the co-sureties. Release of the surety do not discharge the remaining sureties or the guarantors from the liabilities they have.

This Section of the Indian contract act provides that the  release of a co- surety will not result in the discharge of the other co-sureties. The surety so discharged will not release its responsibility. The petitioner therefore is, not discharged of its liabilities. The sureties so released also continue to be responsible to the other sureties, if the sureties are not joint sureties. In this case the other guarantors were co-sureties and the release of a co-surety will not discharge the petitioner from his liability.

It is also not a case of variance of the terms of the contract between the creditor and the principal debtor (the borrowing company in this case)  i.e., Financial Corporation. The original agreement had not been varied. If Only the release of personal guarantees given separately do not amount to the variance of the contract under section 133 of the Indian Contract Act 1872.

Section 139 of the Indian Contracts Act 1872 contains various elements which are : 

The creditor will either do something which will be  inconsistent with the rights of the surety or omits to do his duties towards  surety and because of that the eventual remedy of the surety that he had against the principal debtor is impaired(weakened) , the surety gets discharged. The object of  section 139  is to ensure that no arrangement is different from that one’s contained in  surety’s contract is forced upon him. The duty of care is owned by the creditor.

For Example:

Z lends money to Y on the security of a joint and several promissory note made in Z's favour by Y, and by X as surety for Y, together with a bill of sale of Y's furniture, which gives power to Z to sell the furniture, and apply the proceeds in discharge of the note. Subsequently, Z sells the furniture, but, owing to his misconduct and wilful negligence, only a small price is realized. X is discharged from liability on the note.

Sitaramaswamy v. Basavayya AIR 1920 Mad 311

It was stated that a person became surety for four defendants and have agreed to be liable for any decree which may be passed against them. The plaintiff obtained a decree against the 1st defendant alone and exonerated the other three defendants. At that time it became surety there were four persons (equally coparceners in a family property as we were told) against all of them he had his own remedy if he had to pay anything under the decree.

They held that a surety should be held to be discharged on the principle of Section 139 of the Indian Contract Act. It may be observed that there was a variance in the terms of the contract between the principal debtors and the creditor which brings the case within Sections 133 or 135 of the Indian Contracts Act 1872